Peugeot Bailout Draws Concern of Lawmakers

(CN) - France's plans to help PSA Peugeot Citroen, the iconic French automaker, have drawn the attention of the European Commission, which will study whether a bailout amounts to illegal state aid.

Peugeot Citroen, the second largest automaker in Europe, has fallen on hard times in recent years.

While regulators tentatively approved $1.5 billion of a $9 billion guarantee by the French government so the automaker could continuing borrowing, the commission questions whether the additional guarantee - plus $112 million more in grants and repayable advances - will lead to market distortion.

"At this stage, the commission intends to verify whether the assumptions underlying the restructuring plan to restore the company's long term viability without continued state support are sufficiently realistic, in particular given the recent trend on the car market," commissioners said in a statement. "The commission wishes to check that the compensatory measures are proportionate to the distortions of competition created by the grants awarded."

In early 2012, Peugeot Citroen announced a major alliance with General Motors, which it hopes will result in $2 billion per year of cost savings through platform-sharing and purchasing power. As part of the deal, GM became Peugeot Citroen's second-largest shareholder and now owns seven percent of the company.

But months later, the French automaker said it planned to lay off 10 percent of its workforce, eliminating 8,000 to 10,000 jobs.

Peugeot Citroen planned to use the restructuring aid to reorganize its industrial and administrative configuration, and launch a research and development project into hybrid technologies. The company expects to be financially viable again by 2015, commissioners said.

Europe's executive body also plans to reopen an old inquiry into whether tax incentives given to Electricite de France (EDF) in the 1990s gave the company a selective advantage over its competitors. The announcement comes a year after Europe's highest court threw out the commission's $1.5 billion fine over the bailout.

In its decision, the Luxembourg-based Court of Justice said the commission failed to examine whether the French government acted as a private investor in a market economy and whether a similarly placed private investor would have given the same incentives to EDF given the circumstances. At the time of the investigation, EDF was wholly owned by the French government.

Regulators had argued that the fiscal nature of France's actions make the private investor test pointless, since private investors have no opportunity to waive tax liabilities. The Court of Justice held, however, that the proper use of the test should focus on the improvement of EDF's financial health and the opening up of France's electricity market rather than the government's means of achieving those goals.

According to a commission statement , the new inquiry will address the high court's concerns.

"The commission will check the economic reasoning and the expected profitability at the time of reclassifying the provisions in the light of what a private investor would have done with the same company under similar circumstances," the commission said. "This means extending the scope of the inquiry to allow the French authorities or any interested third parties to submit their observations on the question of whether the non-payment of tax could in fact represent an investment, and, if so, whether a prudent private investor would have made a comparable investment."

Subscribe to Closing Arguments

Sign up for new weekly newsletter Closing Arguments to get the latest about ongoing trials, major litigation and hot cases and rulings in courthouses around the U.S. and the world.

Email *

Submit